Since being named president of Harvard University in 2001,
former U.S. Treasury secretary Lawrence Summers has sparked a
series of controversies that have grabbed headlines. Summers
incurred the wrath of African-Americans when he belittled the
work of controversial religion professor Cornel West (who left
for Princeton University); last year he infuriated faculty and
students alike when he seemed to disparage the innate
scientific abilities of women at a Massachusetts economic
conference, igniting a national uproar that nearly cost him his
job; last fall brought the departure of Jack Meyer, the head of
Harvard Management Co., which oversees the school's endowment
but had inflamed some in the community because of the
multimillion-dollar salaries it pays some of its managers.

Then, in quiet contrast, there is the case of economics
professor Andrei Shleifer, who in the mid-1990s led a Harvard
advisory program in Russia that collapsed in disgrace. In
August, after years of litigation, Harvard, Shleifer and others
agreed to pay at least $31 million to settle a lawsuit brought
by the U.S. government. Harvard had been charged with breach of
contract, Shleifer and an associate, Jonathan Hay, with
conspiracy to defraud the U.S. government.

Shleifer remains a faculty member in good standing.
Colleagues say that is because he is a close longtime friend
and collaborator of Summers.

In the following pages investigative journalist David
McClintick, a Harvard alumnus, chronicles Shleifer's role in
the university's Russia Project and how his friendship with
Summers has protected him from the consequences of that debacle
inside America's premier academic institution.

ff duty and in swimsuits, the mentor and his
protégé strolled the beach at Truro. For years,
with their families, they had summered together along this
stretch of Massachusetts' famed Cape Cod. Close personally and
professionally, the two friends confided in each other the most
private matters of family and finance. The topic of the day was
the former Soviet Union.

"You've got to be careful," the mentor, Lawrence Summers,
warned his protégé, Andrei Shleifer. "There's a
lot of corruption in Russia."

It was late August 1996, and Summers, 42, was deputy
secretary of the U.S. Treasury. Shleifer, 35, was a rising star
in the Harvard University economics department, just as Summers
had been 15 years earlier when he had first taken Shleifer
under his wing.

Summers' warning rose out of their pivotal roles in a
revolution of global consequence -- the attempt to bring the
Russian economy out from the ruins of communism into the
promise of Western-style capitalism. Summers, as Treasury's
second-in-command, was the architect of U.S. efforts to help
Russia. Shleifer's involvement was more intimate. Traveling
frequently to Moscow, he was directing key elements of the
reform effort under the banner of the renowned Harvard
Institute for International Development.

Working on contract for the U.S., HIID advised the Russian
government on privatizing its economy and creating capital
markets and the laws and institutions to regulate them.
Shleifer did not report formally to Summers but rather to the
State Department's Agency for International Development, or
AID, the spearhead of the U.S.'s foreign aid program.

Personal affection as much as official concern prompted
Summers' admonition. He had come to know that Shleifer and his
wife, Nancy Zimmerman, a noted hedge fund manager, had been
investing in Russia. Though he didn't know specifics, he
understood just enough to worry that the couple might run afoul
of myriad conflict-of-interest regulations that barred American
advisers from investing in the countries they were
assisting.

Summers did not restrict his warnings to Shleifer.

"There might be a scandal, and you could become embroiled,"
Summers told Zimmerman. "You should make sure you're clear with
everybody. People might want to make Andrei a problem some day.
The world's a shitty place."

Summers' warnings proved at once prophetic and ineffectual.
Even as Shleifer and his wife strove to reassure their friend,
they were maneuvering to make an investment in Russia's first
authorized mutual fund company. Within eight months their
private Russian dealings, together with those of close
associates and relatives, would explode in scandal -- bringing
dishonor to them, Harvard University and the U.S. government.
The Department of Justice would deploy the Federal Bureau of
Investigation and the U.S. Attorney's Office in Boston to
launch a criminal investigation that would uncover evidence of
fraud and money laundering, as well as the cavalier use of U.S.
government funds to support everything from tennis lessons to
vacation boondoggles for Harvard employees and their spouses,
girlfriends and Russian pals. It would, in the end, be an
extraordinary display of an overweening "best and brightest"
arrogance toward the laws and rules that the Harvard people
were supposed to live by.

Says one banker who was a frequent visitor to Russia in that
era, "The Harvard crowd hurt themselves, they hurt Harvard, and
they hurt the U.S. government."

Mostly, they hurt Russia and its hopes of establishing a
lasting framework for a stable Western-style capitalism, as
Summers himself acknowledged when he testified under oath in
the U.S. lawsuit in Cambridge in 2002. "The project was of
enormous value," said Summers, who by then had been installed
as the president of Harvard. "Its cessation was damaging to
Russian economic reform and to the U.S.-Russian
relationship."

Reinventing Russia was never going to be easy, but Harvard
botched a historic opportunity. The failure to reform Russia's
legal system, one of the aid program's chief goals, left a
vacuum that has yet to be filled and impedes the country's
ability to confront economic and financial challenges today
(see box, page 77).

Harvard vigorously defended its work in Russia, but in 2004,
after protracted legal wranglings, a judge in federal district
court in Boston ruled that the university had breached its
contract with the U.S. government and that Shleifer and an
associate were liable for conspiracy to defraud the U.S. Last
August, nine years after Summers and his protégé
took their stroll along that Truro beach, Harvard, Shleifer and
associates agreed to pay the government $31 million-plus to
settle the case. Shleifer and Zimmerman were forced to mortgage
their house to secure their part of the settlement.

Russia's struggles today certainly don't result entirely
from Harvard's misdeeds or Shleifer's misconduct. There is
plenty of blame to share. It is difficult to overstate the
challenge of transforming the economic and legal culture, not
to mention the ancient pathologies, of a huge, enigmatic nation
that once spanned one sixth of the earth's land surface, 150
ethnicities and 11 time zones. The Marshall Plan, by
comparison, was simple.

Summers wasn't president of Harvard when Shleifer's mission
to Moscow was coming apart. But as a Harvard economics
professor in the 1980s, a World Bank and Treasury official in
the 1990s and Harvard's president since 2001, Summers was
positioned uniquely to influence Shleifer's career path, to
shape U.S. aid to Russia and Shleifer's role in it and even to
shield Shleifer after the scandal broke. Though Summers, as
Harvard president, recused himself from the school's handling
of this case, he made a point of taking aside Jeremy Knowles,
then the dean of the faculty of arts and sciences, and asking
him to protect Shleifer.

Months after Harvard was forced to pay the biggest
settlement in its history, largely because of his misdeeds,
Shleifer remains on the faculty. No public action has been
taken against him, nor is there any sign as this magazine goes
to press in late December that any is contemplated.

Throughout the otherwise voluble university community, there
has been an odd silence about the entire affair. Discussions
mostly have taken place sotto voce in deans' offices or in
local Cambridge haunts, such as the one where a well-connected
Harvard personage expressed deep concern, telling II:
"Larry's handling of the Shleifer matter raises very basic
questions about the way he governs Harvard. This is fraught
with significance. It couldn't be more fraught."

The silence is now beginning to break, thanks to the
leadership of academic worthies like former Harvard College
dean Harry Lewis, who is finishing a book about the university
to be published in the spring by Perseus Public Affairs. Lewis
agreed to show II the manuscript, in which he asserts,
"The relativism with which Harvard has dealt with the Shleifer
case undermines Harvard's moral authority over its
students."

Whether this new questioning will erupt into yet another
crisis engulfing Summers and the university remains unclear.
What is certain, though, is that the story of Harvard and its
representatives' malfeasance, told in full for the first time
over the following pages, shows how much damage can be done
when the considerable power and resources of the U.S.
government are placed in the wrong hands.

THE SEEDS OF RUSSIAN REFORM WERE planted in the late 1980s
-- when Russia was the Soviet Union and Harvard hadn't yet
arrived. The U.S.S.R.'s seven-decade experiment with
Marxist-Leninist totalitarianism lay in shambles. By 1989, even
as the Berlin Wall fell in Germany, the Soviet Union and its
economy were imploding.

Reform-minded Mikhail Gorbachev, the last general secretary
of the Communist Party, strove to introduce limited economic
and political change. The first competitive elections for the
Congress of People's Deputies were held in March 1989. In May
1990, Gorbachev's populist rival, the maverick Boris Yeltsin,
was elected chairman of the Russian Republic's Parliament. A
month later Russia declared itself independent of the Soviet
Union.

That summer Gorbachev and Yeltsin ordered two economists to
draw up a "500 Days" plan for converting the Soviet Union to a
market economy based on private property. Gorbachev also sought
advice from the West. In October 1990 the then-chairman of the
New York Stock Exchange, John Phelan Jr., led a group of U.S.
securities lawyers and academics to Moscow to begin showing the
Soviets how to form capital markets. The meeting was organized
by the Big Board's Russian-speaking legal counsel, Richard
Bernard, then 40.